The new global wide risk regulation & its impact on banks risk management practices


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The new global wide risk regulation & its impact on banks risk management practices

  1. 1. The New Global Industry-wide Risk Regulationand its Impact on Bank’s Risk ManagementPracticesEneni OduwoleIBM/TWC Risk Seminar EventJune 20th, 2013Oriental Hotel, Lagos
  2. 2. Eneni Oduwole – June 2013Eneni Oduwole – June 2013Preamble The financial crisis of 2007 – 2008 has been classified as the worstfinancial crisis experienced since the Great Depression of the 1930s It resulted in the total collapse of large financial institutions, the bailout ofbanks by Federal Governments globally, and downturns in stock marketsaround the world Housing markets in many economies were affected, resulting in evictions andforeclosures It also resulted in failure of many Corporate and SME businesses, andinadvertent persisting unemployment Individuals experienced decline or erosion of personal wealth that resulted in adownturn in economic activity globallyThis crisis occasioned the panicky and high frequency of regulatory reforms that hasoccurred in the last 5 years
  3. 3. Eneni Oduwole – June 2013Eneni Oduwole – June 2013Compounding Factors Layered Complexity Geometric balance sheet and income growth Stringent investment in Technology Limited knowledge of product complexities Exportation of sharp practices to other jurisdictions
  4. 4. Eneni Oduwole – June 2013Eneni Oduwole – June 2013Badly Hit Organizations
  5. 5. Eneni Oduwole – June 2013Eneni Oduwole – June 2013Outcome As a result, Governments responded by making regulatory changes that werespontaneous and reactive to current market situations. Usually, stipulations made,were thought to: Impact the business model and strategy of firms Increase Infrastructural requirements of organizations Require a long time frame for full appreciation of benefits Be complex for implementation in some cases The cost outlay required for regulatory compliance also increased
  6. 6. Eneni Oduwole – June 2013Eneni Oduwole – June 2013Outcome (cont’d) The replacement by Financial institutions of prudence, conservatism andcommon sense with complex statistical models, products and high riskingneeded prompt redress Regulatory changes aimed at curbing this new habit by putting in place strictregulatory guidelines even if policymakers also suffered dearth of skills toaddress the challenges faced players in the industry Result:Undulating high frequency of policy changes and reversalscreating an environment tagged by Accenture as one of‘Permanent Volatility’
  7. 7. Eneni Oduwole – June 2013Eneni Oduwole – June 2013 Manage effectively the Probability of failure by preventing / reducingfailures in financial markets Ensure that the Severity of failure is minimized and controlled to avoidfirm – industry – systemic failuresRegulatory Objectives
  8. 8. Eneni Oduwole – June 2013Eneni Oduwole – June 2013Loads of it . . .
  9. 9. Eneni Oduwole – June 2013Trends of Regulatory Reforms reported byKPMG in Feb. 20132010 2011 2012 2010 2011 2012 2010 2011 20121 Capital Index2 Liquidity3 SystemicRisk4 Supervision PressureRating5 Governance HighPressure6 Renumeration ConsiderablePressure7 CustomerTreatment AdequatePressure8 TradedMarkets MinimalPressure9 AccountingDisclosure LowPressure10 FinancialCrime&TaxTHEPRESSUREOFREGULATORYREFORMS:2010-2012ReformS/NEMEA-Europe/MiddleEast/AfricaEMEA USA ASIA-PACIFIC
  10. 10. Eneni Oduwole – June 2013Eneni Oduwole – June 2013Challenges for Industry Players• Confusion about business strategy to adopt• Uncertainty of regulatory direction in the short, medium and long term• Hike in cost of regulatory compliance• Increased need for data completeness and integrity• Scarcity of skills• Increased investment in infrastructure• Reduced revenue
  11. 11. Eneni Oduwole – June 2013Eneni Oduwole – June 2013SolutionTo ensure that there was no threat to the continued existence and viability of thefinancial services industry, firms decided on having effectively run internalstructures that regulate risk taking and due diligence by entrenching the disciplineof:RISK MANAGEMENTOrganizations metamorphosed from a value preserving/defensive outlook toRisk Management to a value creating/progressive outlook that made properRISK MANAGEMENT integral to the decision making process
  12. 12. Eneni Oduwole – June 2013Eneni Oduwole – June 2013Evolution of Risk ManagementFrom a quantitative function saddledwith the‘measurement of risk’A proactive role that identifies, assesses,controls, monitors and reports likely riskexposures even at the behest of thebusiness and regulatory environment
  13. 13. Eneni Oduwole – June 2013Eneni Oduwole – June 2013Risk Management ProcessKey Internal Drivers: Leadership owned andmonitored Owned and implemented by All Knowledge/fact based Futuristic in outlook Proactive enablement fordecision making processed Eased data generation Data integrity and completeness Skilled workforce Value creation based
  14. 14. Eneni Oduwole – June 2013Eneni Oduwole – June 2013Key External Drivers Strength and Quality ofRegulatory Supervision Frequency of changes toGuidelines Competence of Policy Makers Global trends Access to informationRisk Management Process (cont’d)
  15. 15. Eneni Oduwole – June 2013Eneni Oduwole – June 2013Risk Culture TrendsSource:
  16. 16. Eneni Oduwole – June 2013Eneni Oduwole – June 2013Global Pulse of Risk Management“The focus on risk regulation is now top of the list ofrisk management issues, a tsunami of regulations iswashing over these firms at the moment”Laurence Wormald, Head of Research, SunGardArticle - Risk Managers fear impact of regulationFinancial Times, April 07 ,2013
  17. 17. Eneni Oduwole – June 2013Eneni Oduwole – June 2013The Future of Risk ManagementCreate + Protect + Sustain Stakeholder Value Continuously assess strategy and business models in alignment with the longterm goals of the organization, for likely exposure to financial, reputationalor regulatory risk Manage risk holistically Institutionalize good governance, structures, processes, controls, andstandards Develop and deploy tools for effective risk management Invest in ICT Continuously evaluate risk taking against the risk appetite of theorganization Develop simple processes and products Conduct environmental scanning periodically to pre-empt regulatorydirection
  18. 18. Eneni Oduwole – June 2013Eneni Oduwole – June 2013Challenges for Risk Managementvis-à-vis Regulatory Reforms Buy-in of Leadership Higher Capital requirements and liquidity buffers High rate of model/procedural obsolesce Exit from some profitable but non-core business Sale of assets/businesses to increase capital Compliance with varied cross-border regulatory guidelines Dearth of skilled labour in managing increased risk Optimal alignment of Risk-taking with the Risk Appetites of organizations Need for greater/higher business integrity Maintaining a holistic approach and commitment to risk management Sustaining an integrated approach to Compliance – Risk – StrategyManagement
  19. 19. Eneni Oduwole – June 2013Eneni Oduwole – June 2013Way Forward Increased Investment and Capacity building in:- Human Resources- Systems and Tools for efficient data generation, processing andreporting- Industry/Market/Environmental scanning procedures Periodic Stress Testing that is also based macro-economic indices Clearly defined roles and responsibilities for Corporate Governance, andRisk Appetite setting and Monitoring Effective Liquidity and Capital Management Increased collaboration by organizations to build capacity and set the tonefor regulatory guidance
  20. 20. Eneni Oduwole – June 2013Eneni Oduwole – June 2013The Outlook for Risk Management?Great!The future is inour hands…
  21. 21. Eneni Oduwole – June 2013Eneni Oduwole – June 2013Questions and Comments pls. . .
  22. 22. Contact DetailsEneni